Underlying profit before tax of $343 million fell short of Han’s forecast by 3 per cent, but within the guidance range of $335 million-$360 million.

This was mainly due to a material earnings decline in the Australia and New Zealand operations. Slower economic conditions have hurt Flight Centre’s trade although the weaker Australian dollar tends to be offset by airlines lowering fares.

“On the flip side, scale and momentum is building up in the offshore regions of the Americas; Europe, the Middle East, and Africa; and Asia, with all three regions reporting higher earnings from the prior year,” Han says.

Flight Centre’s largest earnings contributor, the ANZ unit, suffered a 29 per cent fall in adjusted earnings before interest and tax from the previous year to $176 million.

Growth in total transaction value - the value of all the plane tickets, cruise fares and hotel rooms booked - on an absolute and per-store basis was down from the previous year to 1.5 per cent and 5.2 per cent, respectively.

As the threat of online competition increases in the form or US agents Expedia and Booking, Flight Centre is progressing with a blended online/physical store strategy - by repositioning more stores as specialist/flagship outlets and using its online presence to direct consumers to its specialist stores.

It expects to close about 30 shops during the year, opening 20 new ones in different locations, in an effort to "right-size" its network in terms of retail outlets and staff.

The company has shed almost 300 sales staff over the past financial year.

“We applaud these initiatives, but it will take time to reverse the earnings outlook while consumer sentiment remains subdued in Australia,” Han says.

He has increased our fair value estimate to $39 per share from $36.50, reflecting “a stronger-than-expected earnings outlook over the near term, particularly in the Americas”.

“Nonetheless, our long-term view on the business is unchanged. Flight Centre’s importance as a distribution channel will gradually decline as consumers become more accustomed to engaging directly with suppliers and pure online agencies.

“As a result, commission rates have been under pressure, with ANZ revenue/total transaction value, or TTV, falling two years in a row to about 13 per cent. At current prices, the stock screens as overvalued.”

Han has increased his fair value estimate on Flight Centre to $39 per share from $36.50. This implies a forward fiscal year P/E ratio of 13 times, enterprise value/EBITDA of 6 times, and a dividend yield of 4.2 per cent (excluding $1.49 per share special dividend in FY19).

Han forecasts EBIT margins to average 13 per cent through to fiscal 2024 (versus an average of 16.5 per cent over the last five-years), and expects revenue/TTV to average 11.5 per cent through the forecast period (versus the 13 per cent average over the previous five years) as commission rates fall in the longer term.

Qantas charts a steady course despite profit fall

Morningstar analyst Gareth James has left his fair value estimate for Qantas intact, saying the 17 per cent fall in profit wasn’t as bad as expected.

Shares in the national carrier (ASX: QAN) are currently trading at a 17 per cent discount to James’s unchanged fair value estimate of $5.00.

Underlying net profit after tax, or NPAT, fell 17 per cent to $928 million, short of James’s expectation of $980 million.

Demand in the domestic business sector fell further, compounded by a 19 per cent increase in fuel costs.

“Domestic demand remains soft and we expect this to persist over fiscal 2020,” James says.

“Both capacity and demand fell 1.5 per cent in the Qantas domestic business, which contributes nearly 50 per cent of earnings. This drop was in line with our prior expectations, leading to a 3 per cent drop in segment EBIT to $740 million.”

James expects the fuel bill in FY20 to rise to just under $4 billion on increased consumption, in line with management guidance.

A drop in fuel prices, however, is not expected to mean better earnings, James says, because lower fuel costs encourage rivals to add capacity, which offsets any benefits.

QAN announced a fully franked dividend totalling $204 million dollars or 13 cents per share to be paid on 23 September 2019 with a record date of 3 September 2019, as well as an off market buy-back of up to 79.7 million shares. Once completed,the buyback will bring the total reduction in shares on issue by nearly one third since 2015.

James forecasts a high-single-digit earnings per share compound annual growth rate over the five years to fiscal 2024, driven by a near-term margin improvement from a falling fuel price, boosted by the EPS-accretive buyback.

The fully franked final dividend of 13 cents per share lifts the full-year dividends 47 per cent versus fiscal 2018 to 25 cents per share.